DislikedHi,
Can somebody clarify this please.
Suppose i have following prices from different broker for EUR/USD buy - 1.2929 and EUR/USD sell - 1.3001 So i have an arb opportunity. I buy on one side and a sell on other. Sread is 2 pips. Price moves 5 pips up, i have +3 on the buy side and - 7 on the sell side. Where is the profit? Can somebody please explain it more widely, how is the profit generated.Ignored
The arb is 'captured' in the initial 2 deals - you must BUY in one account at a price LOWER than you SELL in another account - in excess of the commission you must pay. Thats why it is difficult to arb - the bid/offer OVERLAP on two opposing brokers must be in excess of all commission - on EU around 0.5-0.7 pips at best (remember you have to pay commission on both brokers)
You then leave the hedged position open as long as you like - because it is hedged the net position will not increase or decrease (subject to varying spreads and widening that may differ)
The equity on EACH account will vary but not the NET position across the 2 accounts. - you have 'captured' a couple of pips - now you need to 'materialise' them
At some time later you can close the positions TOGETHER and with a bit of luck you 'materialise' your couple of pips profit (but remember one account will be higher in equity, slightly more than the other account is lower in equity)
The net position does not change over time - it is fully hedged, but ACROSS the broker accounts. You still have to be careful. If, while the position is open, the price goes up 1000 pips - one could could hit its margin limit (whilst the other registers loads of profit) so you need to decide when to close the hedge position - Perhaps a good time would be when it is QUIET (so less slippage)
